The Islamic Bank of Britain gives one of the best definitions of the principles behind Islamic finance: "Central to Islamic finance is the fact that money itself has no intrinsic value. As a matter of faith, a Muslim cannot lend money to, or receive money from someone and expect to benefit - interest is not allowed. To make money from money is forbidden - wealth can only be generated through legitimate trade and investment in assets. Money must be used in a productive way."
When applied to an Islamic fund these principles imply a joint pooling of funds where the investor contributes their money for the purpose of its investment to earn halal profits.
A number of ideas are crucial. Instead of a fixed return tied up with their face value, Islamic investments must carry a 'proportionate profit' actually earned by the fund, and that means that neither the principal nor a rate of profit can be guaranteed.
But how do index and fund providers translate these ethical ideas into practical investments? The MSCI Islamic Series, for example, is based on a normal MSCI index of shares but with equity screens applied to weed out all the non-compliant shares. They exclude securities using two types of criteria: business activity and financial ratios. The screens involve excluding any company that derives more than 5 per cent of its revenue (cumulatively) from, the activities like gambling, alcohol and pork processing. For more details, see www.mscibarra.com
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